‘Brexit’ Hits U.S. Stock Market Harder Than an Election

In response to the British vote to leave the European Union, the American stock markets have moved more than they have in response to any presidential election over the past 60 years.

The S.&P. 500 — a broad measure of stock prices — was trading about 2.5 percent lower on Friday morning. By contrast, since 1952, elections have typically led stocks to rise or fall by only a percentage point or two.

In part, this reflects the fact that Thursday’s referendum result was quite unexpected. Election-eve prediction markets had suggested around a one-in-six chance that Britain would leave.

Even sharp and unexpected electoral shifts in the United States don’t produce swings this large. Take the 2000 election, when markets rose and fell by only a percentage point or two, as the networks went back and forth on whether George W. Bush or Al Gore had the edge in Florida and in the Electoral College. Stocks moved by less than a percentage point in response to the subsequent Supreme Court decision certifying Mr. Bush as the winner.

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A monitor showing the stock index at the Euronext Stock Exchange in Amsterdam on Friday.CreditKoen Van Weel/European Pressphoto Agency

Likewise, stocks moved by only a percentage point or two on Election Day 2004, when early exit polls led many to believe that John Kerry had won the election, only to reverse course when it became clear the early numbers were wrong.

Think of Friday morning’s re-evaluation of the price of stocks as the market’s judgment that the British referendum has more profound economic implications for the United States than the difference between a Democratic and Republican president. (Perhaps the contrast this November will prove to be larger.)

Economists focus on stock market reactions because they provide a useful real-time barometer of a nation’s broader economic prospects.

After all, when traders buy a stock index, they’re buying the future earnings of a broad swath of American corporations. The theory is that the price they’re paying should be tied to expectations of future earnings. This morning’s lower stock prices suggests they’re much more pessimistic.

While market reactions are surely neither as rational nor as carefully calibrated as the theory suggests, at least they provide a useful quantification of the conventional wisdom. And that conventional wisdom seems to be that Britain’s exit from the European Union will lead to economic disruption that will echo across the Atlantic.

Justin Wolfers is a professor of economics and public policy at the University of Michigan. Follow him on Twitter at @justinwolfers.